NY futures ended this holiday-shortened week slightly lower, as March dropped 90 points to close at 71.64 cents.

The market finally ran out of steam this week and based on the candlestick chart it appears that sellers have regained control, although not in any convincing fashion just yet. Last minute December fixations have played out via the spread, which has inverted another 60 points to 144 points at Wednesday’s close.

The December notice period, which began on November 23, has quickly turned into a non-event since there were just 1,349 contracts open before Wednesday’s session and we estimate that this number has since dropped to below 1,000 contracts or less than 100,000 bales. So far only 5,200 bales have been tendered and regardless of what happens during the final days of December, the volume involved won’t be anything to get excited about.

What caught our attention though is that overall open interest in futures has remained stubbornly high during this December liquidation period, as it still amounted to just under 252,000 contracts yesterday, whereof nearly 183,000 are in March alone. This is the highest futures open interest ever for this time of the year! Even when we include options as reported by the CFTC Commitment of Traders report, we have the biggest OI in five years – only in 2008 and 2011 were there more bets open in futures and options combined.

What worries us about this massive open interest is that the trade may have backed itself into a corner. The latest CFTC report showed specs at a 8.5 million bales net long, Index funds at 6.8 million net long and the trade at a 15.3 million bales net short. These positions have grown slightly bigger since this report and we estimate that specs and index funds now occupy a combined 16.5 million bales net long, while the trade has an equivalent net short position.

Since the trade short consists to a considerable degree of unfixed on-call sales (nearly 9 million bales as of last count) as well as merchant basis-long positions (long physicals / short futures), it follows that the trade will be a strong net buyer in the futures market over the next six to eight months. In other words, the trade cannot roll its current net short position forward from month to month, at least not in current crop futures.

While the trade will have to be a net buyer, speculators and index funds don’t have to be net sellers. They could choose to roll their net longs from month to month and they may even pick up some roll gains in an inverted market.

Therefore, since the trade has to be a net buyer over time, while spec and index fund longs don’t necessarily have to sell, prices may be forced to rise in order to find willing sellers, be it speculators or other segments of the trade. In this latest move up we had mill fixations push values higher into grower selling, which for now has capped the market from rallying any further. But producer selling will eventually start to wear thin and it will therefore become more difficult to find willing sellers.

Of course there is always the possibility of a flush out on the long side, like we have seen earlier this year when speculators went net short in reaction to macroeconomic fears. But at the current time we don’t see any reason for spec longs to abandon their positions, especially since the market is starting to price in higher inflation down the road.

Since the elections around 1.2 trillion dollars have come out of the US bond market, adding to the trillions of dollars that are already waiting on the sidelines. Some of that money has been chasing the stock market, but hedge funds seem to take a liking to the commodity sector as well. In the current environment a major spec sell-off seems therefore unlikely. This means that the trade has its work cut out to get out of this rather large net short position over the coming months!

So where do we go from here? With December fixations out of the way, the market seems to be ready for a pullback. However, as described above there is plenty of trade buying to be done and for this reason we feel that the market doesn’t have a lot of room to the downside, unless spec longs were to pull out of their positions. We therefore feel that a pullback towards 68/69 cents would have a lot of support and should be bought!

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